Most residential real estate contracts include a provision for deposit. A deposit confirms the buyer is truly interested in purchasing the property and can help convince the seller of the buyer’s good faith.
Most local real estate purchase offers are accompanied by deposit of $1,000, with an agreement to increase the deposit to 10% of the purchase price within 10-15 days after a contract is signed by both parties. Most buyers are reluctant to give the seller the deposit and sellers do not want to rely solely on a buyer’s promise to pay. That results in most contracts requiring the deposit be held in escrow by a third party. Under Florida law, the escrow agent must be a third party.
The escrow agent can be anyone, but is most frequently a person or entity related to the transaction. That can mean one of the real estate brokerages involved in the sale or an attorney. Usually, the broker or attorney working with the buyer will hold escrow. That can lead to conflict, as some believe that if “their” broker or attorney holds the deposit, it would be given back to then upon demand. That ignores the duties of an escrow agent to hold the deposit in accordance with contract terms, which usually means for release limited to closing as part of the purchase price or when the parties otherwise agree. The escrow agent must be sure to exercise fiduciary duty as the deposit holder, separate and apart from any duty owed to client or customer.
An escrow agent has duties to both parties and holds the deposit in the nature of a trust. The escrow agent must act as a reasonably prudent person, using reasonable diligence in accordance with the escrow terms of the contract. If the escrow agent breaches the fiduciary duties of the office or acts negligently, the escrow agent can be liable.
Real estate brokers are subject to the most detailed rules concerning handling of escrow. The Florida legislature has adopted mandatory rules in Section 475.25 of Florida Statutes and the Florida Real Estate Commission (FREC) has also adopted rules in Section 61J2 of Florida’s Administrative Code. Brokers must fully comply with both sets of rules to avoid liability, which could be in the form of damages claimed by a party to the transaction or a fine or termination of license by the state.
What are the rules that must be followed by a real estate brokerage concerning escrow? When a sales associate gets a deposit, the deposit must be delivered to the broker or brokerage no later than end of the next business day (excluding Saturdays, Sundays and legal holidays). The associate cannot hold the funds, as only a licensed real estate broker can hold and administer escrow. The funds must be deposited into an escrow account, which is an account solely used for holding funds which do not belong to the broker (although the broker can have a nominal amount of funds in the account to cover miscellaneous expenses).
Regulations further mandate that the broker “immediately” deposit the escrow funds into an escrow account. Immediately does not mean exactly what it says. Immediately is defined by regulations as meaning deposit into an escrow account no later than the end of the third business day following receipt (excluding Saturdays, Sundays and legal holidays).
A broker placing funds in the brokerage escrow account has no right to a lien or any claim to the funds until the transaction is closed. The broker is allowed to deduct an agreed commission from the escrow unless the amount or time of payment is in dispute. If there is a dispute, the broker can still retain in the escrow account the amount of the claim until the dispute is settled.
The regulations also make it clear that the person giving the broker a deposit may demand return until another party requires some interest or equity, provided the person demanding return agrees to compensate the broker for time and expense incurred before demand or return of the deposit. That means, the buyer can demand return of the deposits until the seller accepts the offer. Most escrow disputes are between buyer and seller. The statutes and regulations again provide direction for the broker in an escrow dispute. When a broker has a doubt about who is entitled to the escrow or has received conflicted demands, the broker must provide written notification to FREC within 15 business days after the doubt or conflicting demands. The broker must also institute one of the following settlement procedures within 30 business days after the doubt or last demand: 1. The broker may file a request for an escrow disbursement order with the FREC accompanied by the contract, and other documents that may be necessary for the FREC to issue a disbursement order. If the dispute is taken to court by one of the parties before FREC issues the order, the broker is to immediately notify FREC and FREC closes its file. The broker can disburse in accord with the order. 2. With the consent of all parties, the escrow dispute can be submitted to arbitration. 3. The broker can file an interpleader action. An interpleader action is a lawsuit in which the broker forms doubt as to entitlement and request a court determine who is entitled to the deposit. As part of interpleader, the deposit is often transferred to the court and the broker is entitled to attorney’s fees and costs paid from the escrow at conclusion of the case. The disputing parties then litigate between themselves as to entitlement.
With the written consent of all parties, the matter may also be submitted to mediation or arbitration. Mediation is a process under which a neutral mediator attempts to get the parties to agree. Arbitration relies on the third party to make a decision concerning who gets the deposit. Arbitration is a mini trial while mediation is a negotiation.
The amount of escrow may only be the tip of the iceberg in an escrow dispute. Most residential real estate contracts include a provision that if there is a dispute between buyer and seller, the prevailing party is entitled to attorney’s fees in addition to any other relief granted by a court. Lawsuits can easily cost tens of thousands of dollars in attorney fees. Attorney fees can exceed the deposit and, since both parties believe they are “right” and will get their attorney fees paid by the loser, deposit litigation can be expensive and protracted.
Even without dispute over a deposit, a defaulting buyer may be surprised to find that his or her liability exceeds the amount of the deposit. Most, but not all, real estate form contracts include a clause which provides the seller’s sole remedy if the buyer defaults is to take any deposit actually made. That is known as a liquidated damages clause. Because it is so common, buyers frequently think all they have to lose is any deposit they actually make. But, some contracts include a liquidated damages clause which provides for buyers to lose all deposits made and which was supposed to be made under the contract. Others have no liquidated damages provision, which means a seller can sue the buyer for actual damages. Actual damages are what is needed to place the seller in a position the seller would have occupied if the buyer had not defaulted.
From time to time there is a “genius” who knows a contract states the seller is limited to forfeiture of the deposit made under the contract. That person thinks if deposit is not made, they have nothing to lose. But, Florida courts have interpreted that type of contract as having no remedy or being illusory when there is no deposit. In those cases, the courts ignore the provision and rule the seller may sue the buyer for actual damages as if there was no liquidated damages clause.
How to deal with deposit and escrow disputes has been deemed important by both Florida’s legislature and the Florida Real Estate Commission. The regulations presuppose that the deposit will be there when the dust settles. That may not be the case if the parties are not careful in selecting an escrow agent. Perhaps the most important issue in escrow is making sure everyone agrees on a trustworthy escrow agent who will keep the money safe until it is properly disbursed.
William G. Morris is the principal of William G. Morris, P.A. William G. Morris and his firm have represented clients in Collier County for over 30 years. His practice includes litigation and divorce, business law, estate planning, associations and real estate. The information in this column is general in nature and not intended as legal advice.